FINANCIAL INTERMEDIARIES IN SETTLER ECONOMIES: THE ROLE OF

THE BANKING SECTOR DEVELOPMENT IN SOUTH AFRICA, 1850-2000.

Stuart Jones and Grietjie Verhoef

University of the Witwatersrand and University of Johannesburg.

South Africa

Paper presented in Session 97: Settler Societies in World History.

International Economic History Association

Helsinki

August 2006.

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FINANCIAL INTERMEDIARIES IN SETTLER ECONOMIES: THE ROLE OF

THE BANKING SECTOR IN DEVELOPMENT AFRICA, WITH SPECIALREFERENCE TO SOUTH AFRICA, 1850-2000.

Introduction

What was the nature of the banking system that had emerged to facilitate the development of

settler societies? There is no definitive response to such enquiry, because of the diversity in

the development of settler economies as well as the involvement of different European

powers. In Africa the British colonies extended over almost two-thirds of European colonial

presence. Financial systems in British colonies were bound to reflect British dominance, well

into the twentieth century. In general, the role of financial intermediaries in both the supply

side as well as the demand side of the development process has been explained by Lance E.

Davis. He maintained that financial intermediaries assisted in channelling investment by both

influencing the supply of funds for investment, that is those intermediaries influenced the

magnitude of investment funds invested, but the intermediaries also affected the demand side

by impacting on the choice of projects investment funds would support. (Davis,1994) Davis

and Gallman also concluded that “… the evidence also concludes that innovations in

intermediation cause an outward shift in the savings supply schedule and thus produce higher

aggregate savings.” (Davis and Gallman, 2001:42) The operations of financial intermediaries

not only mirrored the development in the settler society by the number and nature of

transactions performed, but also influenced the direction thereof by its impact on the demand

side. Engerman et al observed:

“One of the striking changes accompanying – if not causing - economic development

is the dramatic increase in financial transactions among firms and individuals, sometimes

directly between borrowers and lenders, sometimes involving third parties (financial

intermediaries). Over time these third parties played an increasing important role. In part it is

because the type of intermediaries who appeared early on (brokers, banks, stock markets)

grew more numerous; and in part it is because of the introduction of totally new organizations

(savings and loan associations, investment trusts, and central banks). In most societies this

expansion of financial intermediaries fuelled higher rates of savings and investment, more

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rapid growth of the capital stock, and a higher rate of economic growth.” (Engerman,

Hoffman, Rosenthal, Sokoloff,2003:1)

In explaining the direction of development of the world economy as well as the development

of the new world with settler communities, several theories contributed to growing

understanding of such development and further debate about causality and benefit. Lloyd and

Metzer (2005) identified the following contemporary trends in economic explanation of

development: first, the Smithian growth concept of expansion of frontiers by additional inputs

rather than improved productivity; then to the Ricardian concepts of specialization and trade

in an emerging international market, leading to the contribution by Von Thünen with the

emphasis on spatial distribution of production under the influence of transport developments.

Consideration is then afforded to Marx’s conception of the revolutionary development of

modes of production, which later led to new twentieth century explanations of European

colonialism and emerging settler societies. The first attempt to construct a theory of settler

colonialism, is identified in the work by E.G. Wakefield, Letter from Sydney (1829). Wakefield

perceived ‘settler colonialism’ as a society that constructed a social structure appropriate to

capitalist development. (Lloyd and Metzer,2005:23) For the understanding of the role of

financial intermediaries in settler societies, this is significant, since financial institutions were

essentially creations of and prerequisites for the capitalist economy. The economic

development in colonies is analysed by investigation into the extraction of staples, trade and

beneficiation thereof, rather than by reference to ‘frontier’ relations. The development in

settler economies shows capitalist investment in the extraction of staples and production,

leading to essential linkages to inter alia “… financial, transport and final demand linkages

that were of most significance in the 19th century rather than those to manufacturing.”

Industrialisation was therefore initially encouraged by the capital accumulated from resource

wealth, rather than from exports. (Lloyd and Metzer, 2005:25) The ‘dependence’ (where

‘dependence’ is understood in a more nuanced meaning than simplistically interpreted by the

“core/periphery” dependency theory), of colonies on the “…imperial governance framework of

liberalisation and specialisation on capitalist primary production were comparatively beneficial

in the British settler economies.” (Lloyd and Metzer, 2005: 26)

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A recent argument by Engerman and Sokoloff is that the “..superiority of English institutional

heritage, or to the better fit of Protestant beliefs with market institutions” could be enhanced

by providing for a more nuanced perspective on the divergent paths of development in settler

societies. They argue that European colonies in the New World were primarily characterized

by “..their factor endowments, by extreme inequality in their distribution of wealth, human

capital and political influence. We argue, moreover, that these initial differences in inequality

were of major import, because societies that began with great inequality tended,…to evolve

institutions that contributed to the persistence of substantial inequality and generally poor

records of development over the long run.” (Engerman and Sokoloff,2005:3-4) It is therefore

interesting to investigate the role of banking institutions in a settler society such ass South

Africa, in the development of the overall economy of the colony and specifically, the region.

Banking institutions were primarily establishments by or for the settler community in

accordance with their European heritage. In South Africa this was though not only British, but

also distinctly Dutch.

It was in thus in an environment of capitalist economic development created by colonial

powers for settlers, that financial intermediaries emerged as institutions to mobilise savings

and facilitate investment. The introduction of financial intermediaries could benefit the

savings-investment process by reducing transaction costs for savers, reducing the level of

asymmetrical information between savers and the receiving firms and finally improve the

liquidity of assets whereby risk-avers savers might experience a greater sense of safety.

(Davis and Gallman, 2001: 42) In the early stages of economic growth those financial

intermediaries would primarily be engaged in mobilising available savings, rather than

increasing savings. The mobilisation of savings funds depends on how the financial

intermediaries can provide information to savers and reduce their perceived risk. The role of

the financial intermediaries is therefore located more on the demand side: to direct mobilised

savings towards certain sectors of the economy where savers’ claims would be justified and

optimally rewarded. These sectors would be the new growth sectors of the

emerging/developing economy, where investment is required. Financial intermediaries thus

have the dual role of mobilising savings as well as allocating them to projects dependent on

external finance. (Engerman et al, 2003:2) The success of financial intermediaries in

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performing this task, is dependent on strict adherence to ‘rules of the game’ and sufficient

information collection. The role performed by financial intermediaries and banks in settler

economies must therefore be assessed by the degree to which they support the growing

needs of the emerging economies: security for savers and funds for investors.

This paper is concerned with the specific nature of the financial sector in South Africa, with

some reflection on the development of financial intermediaries in other settler economies. The

focus is on the development of the banking sector, thus not considering the full scope of

potential financial intermediaries, such as mortgage markets, equity markets or other asset

markets. This paper will address the trends in the banking history of South Africa, with

references to other settler economies, then reflect on the period of functional stability in the

South African settler economy, and then finally consider the diversion during the period of

functional instability.

Modern Banking in South Africa

The history of modern banking in Africa is in large part the story of banking in South Africa

extending northwards and westwards, bringing best banking practice to regions that were

either unbanked or underbanked. Banking operations were market driven. The first banks

were run by government monopoly. In the Cape colony the DEIC had introduced The

Lombard Bank in 1793, which was in principle, a mortgage bank using paper money called

rix dollars (Rds) and following liquidity constraints, the establishment in 1808 of the Discount

Bank. These government owned banks were the first banking institutions in southern Africa.

The British colonial authority was opposed to the privatisation of banking operations, since it

was feared such a step would undermine colonial government revenue substantially. The

banks yielded annual profits of between £6 000 and £7 000 and colonial revenue “…

notwithstanding the objections that may attach to the Government being engaged in banking

transactions, ought not in the present state of the Colony Finances, to be unnecessarily

compromised.” By the law of the Colony, the business of banking would remain exclusively in

the hands of government. (Arndt,1928:223) Only in 1837 was permission granted by the

British colonial government to establish the privately owned Cape of Good Hope Bank.

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(Arndt,1928:176-234; Solomon,1983:130-131, 137; Houghton,1976:190-191) This step was

hailed as a ‘triumph for private initiative’ (Arndt, 1928:234) In the nineteenth century, after

1850, the market reigned supreme in the British ruled parts of Africa. This was the same in

other parts of the British Empire: “The Australian banking system during the latter half of the

nineteenth century was relatively unregulated, and is considered to be a good example of a

free banking system. …it had few legal barriers to entry, no branching restrictions and.. no

credible restrictions on assets, liabilities or bank capital…” (Hickson and Turner,2002:147)

Economic developed followed closely upon the heels of the banks, not because they caused

development, but because they facilitated the process, primarily because the banks were the

products of private entrepreneurial activity in financial markets. It was observed that economic

growth was widespread in the northern hemisphere before World War ll, amongst others

because “… politicians in these countries recognized how important finance was, and they,

therefore, allowed a broad array of private financial intermediaries to operate. This broad

array allowed the finance sector to quickly respond to new challenges as the economy

developed.” (Engerman et al, 2003: 4) Banks were thus service providers responding to

signals coming out of the market. Banks did not go into remote corners of Africa, where

development was late or slow. Banking lubricated the arteries of commerce and should be

seen as part of a larger growth process. Initially that process was firmly controlled by the

DEIC and later Dutch government rule, as well as under British colonial administration.

The British occupation of the Cape made possible the introduction of the best banking

practice of that era; but nothing happened in the 1790s or, indeed, in the first quarter of the

nineteenth century, because there was no demand for banking services. Ironically, the Dutch

had pioneered a number of crucial financial institutions into the English society (the Dutch

were instrumental in the establishment of the Bank of England in 1694), but did not introduce

private banks to the Cape during DEIC rule.(Ferguson,2003:18,24; Kindleberger,1993:77)

Under DEIC rule the Lombard Bank or Bank van Leening – mortgage bank) was established

in 1793, but firmly under the control of the company. The Company made advances to the

Bank such amounts of paper money as were available and in accordance with the needs of

the Colony. These advances were against land, houses, or gold and jewels. (Arndt,1928:165

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– 169) After 1795 the British authorities in the Cape also discouraged the founding of local

banks.(Solomon,1983:137;Arndt,1928:169-171) Laissez-faire views came slowly to the

imperial bureaucracy, while, only in 1826, did the government in England agree to allow non-

chartered joint stock banks in England. (Kindleberger,1993:82,86) That occurred in the wake

of the nineteenth century’s sharpest and most unexpected financial crisis that swept away

hundreds of small private banks. Banking, with company law one step behind, was evolving

but was still too fragile in the 1820s, 30s, 40s or even the 50s, to produce London-based

banks for business in far away colonies. The British occupation since 1806, however, did

bring in increased merchant activities and therefore the need for common law, with the rights

of individuals to form companies. In 1808 the Colonial Government converted the Lombard

Bank into the Lombard Discount Bank ( known as the Government Discount Bank) to accept

deposits and discount vendue extracts. which led to the foundation of The Cape of Good

Hope Bank in 1836. Others followed, almost all of them small local banks, primarily confined

to serving the needs of local agricultural communities.

This leads directly to the question of whether banking in settler communities differed from that

in other regions. The answer is clearly no. Banking in settler communities was the same as

banking in other agricultural communities, in which the production of products for the market

dominated the local economy and banking services were required both for financing the crop

and financing the sale of the crop. (working capital in both instances) Local merchants then

arranged for transportation to and from the coast to the distant metropolitan markets. In the

Cape the banks’ were closely tied to wine and wheat agriculture and wool, where as in

Australia it was also sheep farming and dairy farming in New Zealand. (Denoon, 1983: 52-

53,84,167 ; Hickson and Turner, 2002:148) In the other direction banks played an essential

role in financing the import of consumer goods or land speculation.

The problem for banks, in a world operating on the gold standard and where runs on deposits

were an ever present concern, was that the economic fortunes of agricultural districts tended

to be tied to the fortunes of the dominant local crop. If depression struck and the price of

commodities fell sharply, farmers were threatened with insolvency that all too frequently

enveloped the local banks. This was a matter of concern in the Cape since the 1840s to the

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1870s and 1880s when falling prices wrought havoc upon the small local commodity

dominated banks(Arndt,1928:269-295) just as it did in the United States in the 1930s, when it

would be hard to describe that country as a settler society. Banking in agricultural

communities in the nineteenth and early twentieth centuries shared a common risk profile in

regions as far apart as South Africa, Australia, Argentina and North America.

Where British laws allowed the development of large and secure multi-branched joint stock

banks the problem of risk was reduced (Born,1983:63-72). In England this had occurred by

the middle of the century after the introduction of The Joint Stock Banks Act of 1833. The

British colonies of South Africa and Canada followed by the last decade of the century and in

Australia shortly afterwards. The United States and Argentina were the exceptions, because

of political interference in the working of the economy. In Argentina currency instability was

added to the problem of insecure local banking and rapacious politicians. In America politics

had not only prevented the evolution of nation-wide banking; it has prevented state-wide

banking (California was the exception), thereby exposing the banks to the risks of single

commodity markets. It was not primarily the market that led to the massive failure of

American banks in the 1930s; it was politics.(Born,1983:272-279) This may be seen by

comparing the Canadian experience with that of the United States. Banking in the British

Empire consequently was more secure than banking in other settler societies organised

around agricultural activities. In Uruguay after the collapse of the Brazilian Banco Mauá,

banks of British origin emerged to offer better banking facilities than those under Brazilian

control. These banks had a clear commercial focus. (Denoon,1983:148) India, also an

agricultural economy, had relatively secure banking, which further supports the argument that

it was a market friendly political environment that played the major role in developing a sound

banking system and not whether settler communities were, or were not, involved. The

experience of non-agricultural Hong Kong provides yet further support to this argument.

At the Cape Colony the British government resisted the introduction of private banking. Arndt

explained : “ Banking, one of the most dangerous enterprises to be found in Government

hands, was a Government monopoly in South Africa from 1792 to 1837 Indeed , not only

banking but nearly every profitable profession at the Cape, banking, surveying, conveyancing,

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transferring of slaves, printing and auctioneering, were all monopolized by the Government to

the injury of numbers with little profit to itself.” (Arndt, 1928: 197) In 1825, when sterling was

introduced at the Cape, the first efforts were lodged to establish a joint stock bank for the

Cape “…to advance its commercial and agricultural prosperity… and as a means to place its

finances on a sure and solid footing.” (Arndt, 1928:196,255) A Cape Town businessman Mr

J. B Ebden applied for a charter to establish a bank at the Cape similar to the charter granted

to the Australia Bank. Ironically the Australia Bank was chartered on the request of an English

company for permission to establish banking operations in Australia and South Africa. The

first modern bank in South Africa was established in Cape Town, the seat of government and

a small merchant community in the Cape Colony. This was the Cape of Good Hope Bank

established in 1837 – a private bank, described as “ as a triumph for private initiative.” (Arndt,

1928: 236; Solomon, 1983: 136). Shortly afterwards followed the introduction of the woolled

sheep to the Eastern Cape in the 1830. Eighteen years after the first settlers arrived, the

Eastern Province Bank was established in Port-Elizabeth in 1838 (Webb,1992:6;

Arndt,1928:238), and by the middle of the century both the Eastern and Western Cape were

dotted with small unitary banks – 27 unit banks with paid up capital of £924 021.

(Arndt,1928:254) These banks resembled the early Australian banks : unit bank structure,

owned and managed by merchants of the locality concerned, based on the principle of

unlimited shareholders’ liability, issued their own bank notes and were virtually uncontrolled

by government. These small banks were not the only enterprises undertaking banking

business, as some well established mercantile firms conducted their own ‘private banking’,

by issuing their own bank notes,eg the Barry and Nephews merchants of the Overberg area,

or the Mosenthal Brothers of Graaff-Reinet. (Solomon,1983:138) What is important, is the

emergence of formal and informal networks of financial intermediation after the demise of

government controlled banking in the Cape, paving the way for extensive networks of savings

and credit to support flourishing business. Not all such enterprises were eternally successful:

during the mid-1860s severe drought and adverse agricultural conditions coupled with

extensive credit creation led to the liquidation of many of these small unit banks in the Cape.

This development did not lead to economic or financial instability, since the so-called

‘imperial’ banks had entered the market by 1861. As in 1835 the Australian Bank was

established in England to extend its capital in the Colonies where interest rates were higher

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than in England, so various other banking companies followed almost 25 years later. The

London and South African Bank (LSAB) was established and incorporated in London in 1861.

It was established solely to conduct business in the Cape, with ambitious plans to extend a

branch network in the colony. In 1862 the Standard Bank of British South Africa (SB) was also

established with the same purpose. The small unit banks were perfectly suited to the needs

of the communities of the day and could not be compared to the so-called ‘wildcat’ banking of

the United States. Their limited capital and inability to extend it easily, together with the close

ties to local fortunes, placed them at risk when disasters such as drought affected the

agricultural economy. As Engerman et al noted: ”…financial crises, far from always being

disasters, can sometimes generate responses that promote financial innovation.” (Engerman

et al, 2003:4) The small banks in the Cape Colony were often family affairs that had no

interest in expanding business across the Colony or into other British possessions. The

demise of the small agricultural banks ushered in the era of the ‘imperial banks’. (Jones,1996)

Banking functions had taken on their classic form in London in the second half of the

seventeenth century, when the London goldsmith bankers developed the modern bank-note

and added the issuing of bank-notes to that of taking in deposits and making short-term loans

by discounting bills of exchange. These functions remained fundamentally unchanged until

the late 1960s. For three centuries these constituted the core activities of British banks.

Small changes occurred. Overdraft facilities, backed by the appropriate collateral, joined

discounting as a way of earning interest on the banks deposits and in the later nineteenth

century the purchase of foreign exchange or equities provided additional new services for

customers. Modern banking, therefore, had developed in an urban commercial environment,

heavily orientated to overseas trade, and then expanded from that base into the market towns

of England in the eighteenth century, before being swept up in the growth of manufacturing

associated with the industrial revolution, from where it was exported to developing regions on

the periphery of the industrialising North Atlantic districts in settler communities, but worked

well in the market towns that emerged to meet the needs of such agricultural communities.

The semi-subsistence agriculture of the South African Republic for example, could not

support a banking network, before the discovery of gold.

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Banking functions can be divided into two categories as financial intermediaries and as

money creators.(Solomon,1983:128). The latter was the result of banks taking in deposits and

lending them out though the operations of the bank multiplier was not fully understood until

well into the second half of the nineteenth century. At a time when the coinage was

inadequate and central banks did not exist, the banks made a valuable contribution to the

country’s monetary supply. Yet it was not their money creating functions that led to the

formation of banks. It was their function as financial intermediaries. It was the demand for

these services that was the driving force behind both the evolution of the London goldsmiths

into modern bankers and the development of the first banks in the Cape. A place of security

into which one could deposit surplus funds was an obvious function, as was the provision of

short-term loans to merchants and farmers. That this was done by means of discounts was

the result of acting in i.e. gold standard environment, in which customers could demand gold

coins at a moment’s notice, either for their deposits or in exchange for bank-notes. Banks

that lent long-term had a tendency to enjoy very short lives. Discounting was accompanied

by the other major service provided by the banks, that of making and receiving payments.

Remittance work was just as important as the provision of working capital.

It is important to understand the good sense behind the development of banking functions

that were so enduring. For three centuries they provided a solid framework of reference for

banking in British colonies. They did not prevent banks from being badly managed and

collapsing, as the experience of the Cape so dramatically revealed in the late 1860s. Yet this

same experience showed how the London-based imperial banks had abided by the rules.

These banks were managed from London, operated under limited liability and had access to

capital bases far in excess of the combined capital of all the small banks collectively. [The

total capital of the 27 small banks in the Cape Colony in 1861 was £1 572 815, with the

largest bank controlling capital of £120 000. The capital of the LSAB was £400 000 and that

of the SB £1 000 000. (Arndt,1928:255 – 257;Jones,1996:6,11,24) The imperial banks did

not collapse and, in the 1890s, when Australian and South American banks were going down

in droves, the South African banks sailed serenely on. The potential economic instability of

the failure of the small banks in the 1860s was smoothed out by the intervention of the

imperial banks, that brought in the ‘innovation’ of branch networks to the British possessions

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in southern Africa. No imperial bank failed in either the 1890s or 1930s, when the ruins of

unitary banks in America were littering the landscape. The reasons for the solidity of South

African banks was the quality of their management and the insistence on focusing on the

classic functions, even though this meant eschewing long-term lending and saying no to

customers and governments.

Commercial banks, (in England clearing banks) were not development banks or industrial

banks. Nor were they expected to act as merchant banks. Their task was to provide services

to local people who required them and could pay for them. Only after two decades of

unparalleled world-wide economic growth in the 1950s and 60s did banking functions begin to

change; and then it was in an environment of government controls and government managed

currencies that accompanied market needs. How unchanging traditional banking was in

South Africa may be seen in the accounts of the Standard Bank. Their sources of earning in

1960 were little different from those in the 1860s, which in function were probably not so very

different from those of seventeenth century England. Over time, interest on discounts or

overdrafts provided around two thirds of total earnings. The other third came from

commissions on foreign exchange, ledger fees and payments out of

accounts.(Jones,1996:111,257)

This paper argues that the century and a half considered here may be divided into two period,

that of functional stability between 1850 and 1970 and that of functional change or instability

1970-2000. The first of these periods may be further subdivided into a period of vigorous

local expansion in the 1850s followed by a long period of dominance by the imperial banks

that lasted from the early 1860s to around 1970. The period of change that then began falls

into two sections, the era of moderate change in the 1970s and 1980s, and the years of rapid

change in the last decade of the century. While the long period of stable functions was

characterised by overseas ownership by conservative banks, in the new era of change

ownership was not a major factor in determining the introduction of new functions, or

products, as they are now called, nor in determining the explosive growth of the 1990s. The

world outside South Africa had developed the classic banking functions of the nineteenth

century and the world outside South Africa developed the new functions that transformed

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banking in the traditional commercial banks en masse moved into territory hitherto considered

the preserve of merchant and industrial banks. This, in turn was made possible because a

sizable manufacturing sector had developed in the second half of the twentieth century.

Part I: THE PERIOD OF FUNCTIONAL STABILITY, 1850-1970

1. The Situation in the 1850s

On the eve of the great mid-Victorian boom that embraced the third quarter of the nineteenth

century, the economy of the Cape was poised for growth. The Cape Colony was one of the

regions on the periphery that was being drawn into the economic orbit of the expanding North

Atlantic core with the development of its wool industry – about a quarter of a century behind

similar developments in Australia.

Pastoral booms triggered the formation of a host of local banks in both the Cape and Australia

and, as Mackay noted over seventy years ago, these tended to occur in clusters. In Australia

these clusters occurred in 1817-30, 1834-41, 1851-55, 1863-73 and 1919-26; in South Africa

in 1838-39, 1844-54, 1857-62 and 1891-92.(Jones,1994:63; Makay1931:237) The need for

remittance services played a major role in their formation. Banks, that allowed farmers or

local merchants to pay for their inputs with discountable bills of exchange and to receive cash

or credit for sales of wool, were a valuable resource to a farming districts perennially short of

a circulating currency. This shortage led naturally to the issuing of local bank-notes and, as

the business developed, to the banks allowing customers overdraft facilities. These, however,

in small unitary banks, all too often tended to flow into the pockets of directors or friends of

the directors, thereby making the banks very vulnerable to a downturn in the market.

Nevertheless, when the taking in of deposits is added to their functions, one can see that, in

the 1850s, the Cape banks were reproducing the classic functions of the seventeenth century

London private bankers. These basic banking functions were conducted in all the banking

enterprises in settler economies – it was exactly that which the British banks did in Australia in

the wool industry (Denoon, 1983:52-53, 152,165-166)and in New Zealand dairy industry

(Denoon,1983:167).

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Banking, therefore, was already a conservative business in the 1850s and this conservatism

was emphasised by the need to pay gold upon demand. At all times the banks had to have

sufficient gold in their coffers to meet any expected, or unexpected, runs on them. In theory

banking should have become steadily safer as each succeeding financial crisis led to a

Darwinian process of selection with the weaker disappearing. In practice, though, this did not

happen, as America learned in the 1930s, when two thirds of the country’s bank closed their

doors and one third did not re-open them. Nor did it occur in South Africa in the nineteenth

century, as the small unitary banks that had sprang up in the boom times inevitably developed

serious problems when the boom ended and interest rates rose.

Conservatism in function did not provide banking security. Nevertheless by 1860 the 27 Cape

banks had managed to raise £945,186 in capital. At that time they were more numerous than

their counterparts in Australia! Twenty six banks had been funded in Australia by 1860, but

three had been absorbed by other banks and six had failed. (Jones,1996: 17-19). Some of

the Cape banks had capital of £100,000, but the majority were small and had insufficient

reserves to withstand a prolonged downturn in a staple economy. Nor, in 1860, were most of

them controlled by men with banking experience. They were known to be insecure, which is

why the coming of the imperial banks presented a very real threat to their continued

existence. That threat was upon them, for in 1860, the first of the imperial banks, The London

and South African Bank was being established in London. Soon other banks were to be

established in South Africa.

2. The Period of Dominance by the Imperial Banks, 1860-1970.

During the period of stability, South Africa remained tied the gold standard, though after the

First World War gold coins gradually ceased to be the main circulating medium. It seems like

that there was a connection between the continuance of the gold standard and the

conservatism of banking functions. Being on the gold standard kept inflation in check and

prevented politicians from trying to stimulate growth prior to elections by expanding the

currency. Since periods of rapid economic growth combined with high inflation tend to lead to

15

change, financial intermediaries could not remain immune to what was going on around them.

Conversely, periods of relatively stable prices, tend to strengthen the conservative forces in

both society and economy. In the long period between 1860 and 1970, with the exception of

the immediate post-war years, when exchange rates were fluctuating alarmingly, and again,

1931-32, when the National Party government resisted devaluing the currency, South Africa

experienced currency stability, low inflation or deflation, and moderate economic growth. The

existing structures and ways of doing things worked well. There was little pressure for

change.

This absence of sustained demand for change was reinforced by very success of the imperial

banks. They survived, when all the local banks failed. Between 1862 and 1892 with the very

small exception of the Stellenbosch District Bank, al the local Cape banks disappeared from

the scene, leaving the Cape Colony dominated by the Standard Bank and the Bank of Africa.

(Jones, 1999:111) The imperial banks, like the local banks, trained their managers by the

apprenticeship system that placed a premium on caution. Yet the strategy of the imperial

banks was different from that of the local banks. From the beginning the London-based

banks set out to cover the whole colony with a network of branches and, in determining

policy, they took into account the interests of the whole economy and not that of single

localities.(Jones,1999:113: Arndt,1928: 295) This strategy required a larger capital base

which in turn provided the imperial bank with greater security. It also provided them with the

means to take over small local banks, when the business cycle moved downwards. The

imperial banks in Australia though, were not invariably better positioned to weather the storms

than the locally incorporated banks, as locally incorporated banks survived the 1890s crisis

better in Australia than the imperial banks. This is ascribed to the ‘…greater caution of the

Sydney bankers.” (Denoon,1983:166;see also Jones,1994:65-68) In Australia the imperial

banks brought stability by offering capital when a shortage of capital was experienced,

extended branch networks and limits on volumes of discounts and restive covenants

concerned with collateral and skills. (Merret, 1992:306- 308) These benefits stemmed from

the direct links with the London directors and London offices of these banks available to the

banking operations in the settler societies.

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The attempt to achieve rapid growth in South Africa, by opening branches did not last long. In

the case of the Standard Bank it lasted less than a year, from the time the first office was

opened in Port Elizabeth early in 1863, to December when the board of directors in London

became alarmed at the speed with which branches were being opened and voted to end

it.(Jones,1999:115) By then the Standard Bank had 18 branches and agencies in operation.

This was a prescient decision, for when Robert Stewart arrived in Port Elizabeth as general

manager in 1865, he discovered that the local boards of directors not only were not effective

supervisors of managers, but that they themselves were absorbing the capital of the banks!

(Jones,1999:115) This was a risk common to settler societies. The policy of growth by

acquisition failed initially. The Commercial Bank of Port Elizabeth was taken over early in

1863 but only one other followed in the early years, the Beaufort West Bank, despite the

directors declared policy of preferring growth by acquisition.

In a slow moving agricultural society there was little pressure to change the strategy of the

banks and so their structure did not change. This was true of the agricultural depression of

the late 1870s and 1880s, when the local Cape banks failed in droves and of the early days of

gold mining. When the deep level mines began to develop in the 1890s, this situation began

to change. Larger enterprises required the services of larger banks. The Standard Bank was

already large and had been the first bank to open a branch on the gold fields, when the South

African Republic was underbanked. The Transvaal Republic failed almost completely to

attract banking facilities and the imperial banks were not interested in rural credit.

(Denoon,1983:163) Local politicians, fearful of the expanding British Empire, supported

Kruger in his scheme to establish a national bank for the republic in 1891-92, as did many of

the new mining houses. (Joubert,1986:93 -136) The Standard Bank was slow to adapt its

conditions for discounts and overdrafts to the new conditions on the gold mines and this

presented Kruger with the opportunity to establish the National Bank, thereby providing

effective competition to the two imperial banks; but it did not immediately lead to any change

in the structure of banking.

Nor did it alter their functions. These had met the needs of an agricultural and trading

community and these were provided for to the new mining economy. Once the mines went

17

deep level in the 1890s, capital was raised abroad, not through the banking system. The

main effect of the development of the Witwatersrand gold mines was on the banks’ remittance

business, which grew rapidly, both from demands of the mining companies and the increased

economic activity that accompanied their development. The British occupation of the

Transvaal led to the National Bank passing into the control of mining interests and to that

bank gaining the accounts of the Transvaal government, but not to any significant change in

the way the banks operated. Banking in the new mining economy was little different from that

of the pre 1886 agricultural economy.

The response of the banking sector in Australia and in the Transvaal to the discovery of gold,

was different. In Australia the gold rush led to urbanization and the emergence of Melbourne

as the financial capital of the country. It contributed to the formation of new locally owned

banks that adopted the best practice of the imperial banks . In South Africa the gold fortunes

enabled the Transvaal government to establish its own bank, the National Bank. This was not

an English bank, but had substantial English capital. While the discovery of gold led to the

formation of a number of new banks and increased competition amongst them in Australia, in

South Africa it ushered in the concentration movement amongst banks. This followed from the

deep location of gold deposits in South Africa demanding capital intensive methods of

production. (Houghton,1976:104-105) In Australia the banking crisis of the 1890s led to

increased government control in banking by the establishment of numerous government

savings banks and after 1893 state lending to farmers.(Lewis and Gallman, 2001:476)

The coming of union in South Africa in 1910 did not alter the strategy of the banks, but it did

trigger the second stage in the amalgamation movement. The growth of the mining industry

had crated the need for larger banks and these larger banks now seized hold of the

opportunity presented by political union to establish themselves in every sizable town in the

Union. Within the space of four years, the National Bank had bought up the two local banks

of any size, the Bank of the Orange River Colony and the Bank of Natal, and the second

largest of the three imperial banks operating in South Africa. By 1914 South Africa had two

nation-wide banks, the Standard and the National and the latter had beaten the Standard

Bank to the post by acquiring the government accounts. Banking operations in South Africa

18

nevertheless remained characteristically privately owned and managed. At no time after 1860

could the banking sector in South Africa been compared to the government controlled and

dominated Australian banking. Banking in South Africa and banking in Australia had

developed in a similar way following the English example, but began to diverge as South

African operations became increasingly concentrated and Australian operations government

controlled. The imperial banks could not sweep aside competition in Australian banking as

comprehensively as in other parts of the Empire. By 1890 22 banks were issuing notes in

Australia and after 1890 Australia was still served by imperial, Australian as well as parochial

banks. The different banks nevertheless obtained much of their capital from London or

Glasgow, but local incorporation remained. Banks in Australia also serviced New Zealand

businessmen. (Denoon, 1983:150,154)

In South Africa continental banking experience also entered the business of banking when the

Dutch opened the Nederlansche Bank en Credietvereeniging (NB en CV) in 1888, initially with

the hope to obtain the Transvaal Republic’s concession to establish the National Bank.

Although this attempt failed, the NBvZA was nevertheless incorporated in Amsterdam and

operated primarily in the Transvaal with the view to finance international trade between South

Africa and Europe. Dutch banking was less conservative than the English practice but

directed its operations at financing trade. The NB en CV was a wholesale bank, as opposed

to the typically commercial banks from England. The NB en CV concentrated on urban

business and was wholly uninterested in the gold mining industry nor in rural agricultural

credit. The NB en CV opened branches only in commercial centres, such as Johannesburg,

Pretoria, Durban, Cape Town, and Dullstroom, where a well established Dutch community

had settled. The NB en CV operations remained marginal until after World War ll, when it

pioneered innovation in commercial banking in South Africa. (Verhoef, 1992: 80 -83) The

uniqueness of the conglomerate European descent of the settler community of South Africa

thus added a more risk prone and commercially challenging banking dimension to South

African banking than had been the experience in other British colonies, such as Australia and

New Zealand. The important contribution of Dutch banking was the extension of the network

of South African business into continental networks, especially the dominant Dutch

international trading networks. The Dutch link was also influential when the Princeton

19

economist, Kemmerer, lobbied strongly for the return to the gold standard by Britain and other

countries by 1926 in order to restore international financial stability. (Bordo, Edelstein,

Rockoff, 2003: 300 – 302) The Dutch link through Kemmerer and Vissering Report (1925) on

the return to financial stability via the gold standard, as privately expresses by South Africa ,

Australia, Switzerland and the Netherlands, illustrated the centrality of those markets by the

late 1920s to international trade and finance. Although the NB en CV was still marginal to the

banking industry in South Africa, it constituted an important connection to continental banking

and the international trade centre of Amsterdam for the settler community in Southern

Africa.(Neal and Quinn,2003:14)

No significant change in functions accompanied the acquired oligopoly in South African

banking, though the exchange business was expanding from arranging for payments in

London to payments world-wide with the country’s expanding network trading partners, at a

time when both France and Germany were important buyers of gold mining shares. To this

development the NB en CV contributed effectively as well. The imperial banks also purchased

equities for customers. This business, though, was limited at a time when most bank

managers considered the Johannesburg Stock Exchange to be a casino. After 1918 further

ownership changes occurred, the full gold standard was only restored in 1926, but no

significant change developed in banking functions. The National Bank got into difficulty in

1924-5, as a result of reckless expansion in the immediate post-war years and a policy of

granting easy loans in the post-war boom conditions, which resulted in the collapse of the

bank when the depression struck in 1920. A lifeboat was found in the creation of Barclays

Bank Dominion, Colonial and Overseas (DCO) in 1926, which took over the business of

National Bank and amalgamated it with a small West Indies bank and an Egyptian bank.

(Jones,1996:42 -52; Solomon,1983:144-146) This intervention of another imperial bank was

characteristic of the impression of stability displayed by those banks. Denoon commented: “

Commonly, but not invariably, the imperial banks were more cautious in their credit policies

than the local banks, rarely venturing their capital in long-term or speculative enterprises.”

(Denoon, 1983:166)

20

Economic growth had been disappointing in the Edwardian era and this pattern continued in

the 1920s. This situation changed in the 1930s, after South Africa devalued the pound. In

these years, too, the pace of technological change remained relatively slow, thereby reducing

the pressure to innovate in the service sector. It was only in the 1930s that Johannesburg’s

future became assured and the fear of becoming a ghost mining town died away – a fear that

was still present in the 1920s. On the whole, therefore banking remained uncomplicated and

somewhat uncompetitive in the inter-war years.

Three main consequences flowed from the amalgamation movement in South African

banking. First among these was the creation of the banking cartel, known as the Register of

Co-operation (ROCO) among banks, that fixed interest rates and commission charges. It

emerged in the immediate pre-war years and lasted until the 1970s. Although Monteith

argued that such collusive agreements amongst banks in the West-Indies did not exclude

competition completely amongst the commercial banks, (Monteith,2000: 67 -87), ROCO in

South Africa curbed competition and restricted access in favour of the imperial banks.

(Verhoef,1986:412 -415; Skinner and Osborne,1992:65) A second consequence was the

creation of nation-wide bank clerks trade union (SASBO – South African Society of Bank

Officials) that in practice also tended to reinforce the conservative elements at work in the

sector. A third consequence was that very large banks would not be allowed to fail. In 1925

this applied to the National Bank. At that time the newly established central bank (established

in 1923), the Reserve Bank was still learning the ropes and was in no position to attempt a

rescue, which was why the help of a large overseas bank was necessary and why nationalists

had to welcome the arrival of Barclays.

Another possible consequence of the concentration in banking was declining productivity

within the banks. This was a long-term trend in the Standard Bank, as productivity, in period

1900-1914, was lower than in the period 1885-1900, and declined further in the inter-war

years.(Jones,1996:180) Evidently political developments had not provided the British bank

with undue favours. It does, however, suggest that oligopoly and cartels reduce the need to

innovate, If reduced competition exerted a negative impact upon the banks in the first half of

21

the twentieth century, then it might be expected that the disappearance of the building

societies at the end of the twentieth century to have had a similar effect in the 1990s.

The relatively slow growth of the economy may be seen in the figures of the deposits and

discounts of the commercial banks. Adjusted for price movements these show deposits grew

by 38 per cent in the decade 1919-29 and by 65 per cent in the decade 1929-39. Discounts

moved in the opposite direction, growing by 88 per cent in the earlier period and 29 per cent

in the later period. (Jones,1996:180-188) The importance of discounts as a proportion of

bank assets had already begun its long decline In these two decades the banks’ importance

declined. The national income benefited more from the expansion of the gold mines in the

1930s than in the two large banks. As a result, the demand deposits of the Standard Bank

and the National Bank, as a proportion of national income, fell from 21 per cent in 1919 to

18.5 in 1939, (Jones,1996:188-189) providing once again evidence that banks are followers

rather than leaders in the process of economic change.

The banks survived the Second World War relatively unharmed and, but faced a more

uncertain political future in a world, in which Britain’s economic influence was declining. The

threat to the future of the gold mines by a fixed gold price was reduce by Britain’s devaluation

in 1949. This paved the way for the expansion of gold mining into new explorations in the

Free State and then into the Far West Rand. It could not, however disguise the rise of Afro-

Asian nationalism that accompanied the decline of European nationalism. In Asia, India led

the way, in Africa, South Africa, with the election of the National Party Government in 1948.

As a result, the pressure for change in the financial sector focused not on the type of business

conducted in modern jargon,’ the products they sold’, nor on the type of customer they

served, but on who owned the banks. In the decolonising world all the African states adopted

some form of national socialist policies. In sub-Saharan Africa national socialism merged with

Marxist socialism and tribalism. In this respect, some aspects of national socialism also

surfaced in South Africa.

This had implications for banking in the 1950s and 60s, because the importance of the market

was diminishing and that of politicians enhanced. Planning became fashionable, with the

22

Soviet model seducing both France and India, and failing. Five year plans of a strict socialist

nature were not adopted in South Africa; but there was talk of nationalisation of the mines and

of the banks. In the event the economic environment of the 1950s was not sufficiently robust

for the new National Party government to make any revolutionary moves. Balance of

payment constraints periodically threatened the economy, especially in the wake of the capital

flight that followed the 1948 election, but more specifically after the decision to leave the

British Commonwealth and accept the status of a republic in 1961. Subsequent to that the

Sharpeville incident caused great alarm and contributed to a substantial capital flight.

Nevertheless the new government made use of its extensive patronage facilities to direct

resources into the hands of its supporters and to politicise the bureaucracy at the central,

provincial and municipal levels.

The South African economy shared in the world-wide growth that characterised the quarter of

a century after 1948. The driving force was a combination of renewed expansion in the gold

mining industry and import substitution. Political unrest following the Sharpeville incident led

only to a temporary setback in the early 1960s that, in effect, highlighted the vigor of the

growth later in that decade. Indeed, growth in both decades was beginning to place pressure

on existing financial practices. GDP rose by 80.6 per cent between 1951 and 1960 and then

by 123.1 per cent in the nine years from 1961 to 1970. (Jones and Muller,1992:129,231) The

looming population explosion reduced per capita growth in GDP to 61.9 per cent while rising

inflation further reduced the real benefits of this growth. Growth of that magnitude made it

possible for new institutions to emerge to challenge the dominance of the two imperial banks

and for the first merchant bank, Union Acceptances, to be established in 1957, but it did not

lead to the introduction of significant changes in banking functions.

The decade of the 1950s was characterised by renewed competition in banking, first between

the Standard Bank and Barclays and then, as the decade progressed, with Volkskas. In the

early 1950s, though, both the London-based banks were slow to recognise the threat posed

by Volkskas at a time when the country’s foreign trade was still predominantly tied to Great

Britain. Government accounts were systematically transferred to Volkskas, but it was only

after the National Party’s second election victory in 1952 that the two imperial banks awoke to

23

the full nature of the threat to their cosy cartel. In 1953, the Netherlands Bank broke ranks

from the cartel and began to quote lower rates for the transfer of funds to South Africa.

(Verhoef,1986:441-442 ;Jones and Muller,1992:62-63) The Netherlands Bank also began to

pay higher interest on deposits to counter competition from the building societies. Volkskas,

with it domestic branch network, provided the real threat and, as Verhoef observed, the

Volkskas’ proportion of total bank assets rose from 3,17 per cent in 1947 to 10.3 per cent ten

years later.(Verhoef,1992b:131) Their proportion of advances grew at a slightly slower rate

from 6.3 per cent to 11.4 per cent and that of total deposits from 2.8 per cent to 9.9 per cent.

The newly established Trust Bank provided further competition in the later 1950s. For over

thirty years the two imperial banks were the epitome of gentlemanly capitalism and

gentlemanly competition in South Africa. (Cain and Hopkins,1993) How much this had

contributed to a weakening in their entrepreneurial drive, it is difficult to say. What is clear is

that a more hostile political environment was inexorably threatening the dominant position of

the traditional banks, but not yet, in 1960, leading to any radical changes in banking functions.

Sustained economic growth in the 1960s then led up to the changes in both function and

ownership that occurred in the last decades of the century. This same economic growth also

undermined the basis of apartheid and made the realisation of racial separation unrealisable.

By the standards of South East Asia, South Africa’s growth in the 1960s was relatively

moderate. Between 1961 and 1970 GDP rose by 123 per cent and per capita GDP by almost

62 per cent, if the population statistics are correct.(Jones and Muller,1992:131) Admittedly

the gold mines were still increasing their output, but their Indian summer was not the driving

force behind the growth of the economy. This was manufacturing. Moreover, government

policy had belatedly changed from import substitution to export promotion. It was the

expansion of manufacturing that made it possible for the economy to support a couple of

merchant banks in the 1960s, in addition to providing a market for the ebullient Trust Bank

that introduced an American style of banking into the country. In practice this meant heavy

spending on advertising, putting up glossy new buildings staffed by dolly birds in bright

costumes and one new function. In America overdrafts were not allowed and Trust Bank

followed this practice. Instead, customers wanting to borrow money from the bank had to

sign notes, which the bank then bought and with an agreement for monthly payments. In fact

24

the Trust Bank pushed personal loans energetically, appealing to newly embourgeoised

Arikaners; but in the 1960s wealth generation was neither sufficiently vigorous, nor yet

sufficiently extensive to induce a major change in banking functions. As for Trust Bank its too

rapid growth, built on the quick sands of easy credit came to a abrupt halt at the end of the

decade and then led to its virtual collapse. Thirty years later the losses incurred during its

imprudent dash for growth with relaxed lending policies were still causing ABSA difficulties.

[Amalgamated Banks of South Africa, or ABSA, was the successor conglomerate bank that

emerged from the merger and take-over by Volkskas and the largest building society, the

United Building Society, of numerous other smaller banks, Trust Bank and smaller building

societies in early 1990s.] Proof was thereby given, if ever it was needed, of the value of the

conservative banking practices introduced and enforced in South Africa by the imperial banks.

(Verhoef,1992b:151-153)

At the end of the seventh decade of the twentieth century banking functions remained in

principle the banking functions of 1850. Limited liability had come and been accepted. Bank

notes had been issued and then discarded before the impact of the Reserve Bank’s notes.

Gold coins had disappeared from circulation while bank deposits formed the major

component of the country’s currency. In 1970 the two British banks still gathered in the bulk

of the deposits and provided the bulk of the loans. These conservative banking practices

resembled the operations of the British banks in Argentina. Banking in Argentina was

dominated by two large official Argentine banks, the Bank of the Nation and the Bank of the

Province of Buenos Aires. Both failed during the 1890 crisis, but were reconstructed relatively

successfully. Domestic banks in Argentina developed more extensive branch networks than

those in Canada or Australia, and thus drew deposit primarily from domestic savers. These

banks concentrated on the financing of trade and agriculture. Apart form the official banks,

private banks developed from mercantile interests and conducted business relating to lending

to and investing in industrial enterprises involved in bridging landed and manufacturing

operations. The foreign banks were engaged in the usual commercial banking functions and

syndicated long-term debt underwritten by merchant or private banks. Davis and Gallman

stated: “Of the foreign (British, French, Italian and Spaniard) banks, the British were the most

important and the most successful. Unlike their domestic and Continental counterparts, their

25

loan policies were typically conservative. They followed the real bills doctrine, largely limiting

themselves to short-term loans supported by commercial paper, and held very substantial

reserves, reserves that at times amounted to one-half of their total assets” (Davis and

Gallman,2001:791-792) These Argentine banks were able to survive the 1890s crisis which

earned them enhanced reputation amongst Argentine savers which positioned them as a

significant actor in Argentine banking.

In Australia government intervention in the financial sector characterised the banking sector

from early on. Despite the relative absence of regulation of the banking sector in Australia

during the latter half of the nineteenth century (Hickson and Turner, 2002), government-

owned savings banks were established since the 1860s and government was increasingly

involved in financing agriculture. In nineteenth century South Africa banks were opposing

government involvement as experienced during Dutch rule and early British control, but in

Australia “…the habit was to look to the central government…” (Davis and

Gallman,2001:478) and as Lloyd explained: “By 1905 Labour had come down decisively on

the side of protection…The main building block was state ownership of key sectors of the

national economic infrastructure, notably…. the new ’people’s bank’, the Commonwealth

Savings Bank.” (Lloyd,2003 :414) The reconstruction of the banking sector in Australia took

place through massive government involvement, (Davis and Gallman, 2001: 506 -512)

whereas the banking failures of the 1860s in the Cape Colony was met with private initiated

restructuring of the banking sector – the imperial banks absorbed ailing small banks and

developed branch networks to extend their operations. Both the Australian and early South

African banking operations depended heavily on capital from London, but in South Africa

colonial governments were not spearheading the restructuring of banks. In Australia

government regulation of the banking and finance industry after the 1890s crisis, resulted in

the formation of government owned banks in competition with privately owned financial

institutions in the interest of financial stability. (Merret, 2002:269-280) The nature of banking

practice in both settler economies nevertheless remained predominantly conservative British.

Two factors changed this adherence to basic British banking in South Africa: political

intervention, which commenced during the late twentieth century, and innovation and

diversification by the Netherlands Bank as well as non-commercial banks, such as Trust

Bank.

26

Political pressures were bringing about changes in ownership. Banking legislation in South

Africa was amended in 1972. Banks operating in South Africa were required to invest a

substantial proportion of their long term liabilities in prescribed investments, that would be

used to finance public sector needs. Shortly afterwards the government required foreign

shareholding in banks operating in South Africa to be reduced to 50% of total shareholding.

(The Netherlands Bank disinvested in 1970 and the Standard Bank became a South African

company in 1969 with a portion of its equity held locally. Barclays followed two years later.

Jones and Inggs,1999) Change was in the air, but, in 1970 this had not yet extended beyond

bank ownership to bank functions. Nor is there yet any evidence that banking in a settler

community was in any significant way different from banking in metropolitan Britain. Merchant

banking and industrial banking were different and in those sectors new functions were being

developed, but in 1970 these had not yet flowed into mainstream commercial banking.

Part II THE PERIOD OF FUNCTIONAL TRANSFORMATION, 1970-2000

2.1. The Period of Moderate Change, 1970-1990

Private enterprise had pioneered the introduction of modern banking into South Africa in the

second quarter of the nineteenth century. The functions they performed had been developed

and refined in England to meet the needs of a trading and agricultural economy that was in

the process of industrialising slowly. Risk management had been geared to the needs of a

developing economy so that the transfer of the same services to the settler communities of

southern Africa was a relatively easy undertaking, though it did not, of course, prevent bad

management and the shocks of downward movements in the business cycle.

One and a half centuries later private enterprise once again pioneered the introduction of new

functions into banking in southern Africa, but his time it was led by large corporations. The

most innovative bank in South Africa was the Netherlands Bank, which initiated new banking

‘products’, thus ushering in extensive diversification of banking operations in South Africa.

The Netherlands bank was the first commercial bank in South Africa to break away from the

27

conservative “British” model and ventured into alternative strategies of banking to free itself

from the ‘hold’ by the ‘imperial ‘banks over the banking sector in South Africa. The

Netherlands Bank identified two strategies to counter the ROCO restrictive oligopoly:

development of new ‘banking products’ to be offered in the existing bank network, or establish

subsidiaries to offer related financial services as part of a bank group. The Netherlands Bank

pioneered negotiable certificates of deposit (NCDs) as money market instruments whereby

the bank could escape from the limitations of its small branch network and access money

market funds. The bank established an industrial finance subsidiary (The Netherlands

Finance and Investment Corporation - Nefic) in 1949 and expanded its operations into

merchant banking, a discount house, hire-purchase finance, share issuing and underwriting

and general money market transactions. (Verhoef,1986:270-396) These functions

represented a radical diversion from the British banking model dominant in South Africa by

the early twentieth century. Two decades of rapid economic-growth in Britain with a managed

currency had also altered traditional beliefs and practices. In the 1960s the commercial

banks, responding to market forces from an increasingly affluent society, began to grant

mortgage loans to their customers. This represented a sharp break with the past and two

centuries of tradition, whereby commercial banks had focused on short-term and refused to

engage in long-term lending. It had taken over thirty years since Britain left the gold standard

and half a century since gold coins had circulated widely for this change to be introduced. It

really was revolutionary and yet it was barely noticed at the time when Barclays began to

provide mortgages in the mid-1960s. A decade later Barclays began to grant mortgage loans

in South Africa and gradually the other banks all followed suit. From a market perspective the

banks were more efficient than the building societies, and they were able to charge slightly

higher interest rates and to grant much larger loans. Ultimately this move of the banks into

housing finance spelled the doom for the building societies in Britain, South Africa and

Australia, but not in America where the federal government was heavily involved in

subsidising house buying through Fannie Mae and Ferdy Mac.

This revolutionary move of the South African commercial banks into long-term lending was

paralleled by another almost equally revolutionary innovation, when the banks moved into

vehicle finance. Once again this represented a response by private enterprise in corporate

28

garb to an increasingly affluent society’s demand for automobiles. Hire purchase was

something the commercial banks had looked down upon. It was left either to other fringe

financial institutions to provide the finance for shops selling clothing and furniture on credit, or

for the shopkeepers to do it themselves. The cost of automobiles made the second method

impossible and, in the third quarter of the century, specialised firms emerged to finance car

sales in South Africa. Wesbank was one of these and become widely known as the “wheels

bank.”(Jones,1992:213-235) Both the Schlesinger Organisation, through the Colonial Banking

and Trust Company and the Sanger family through the Western Credit Bank had moved into

vehicle financing in the 1950s. In 1964 the Schlesinger Organisation bought out the Sangers

and four years later merged the two banks into a new entity named Wesbank. When the

anticipated profits of this development did not materialise, John Schlesinger sold out all his

South African banking and insurance interests to Anglo American, which retained the

insurance business but sold off Wesbank to Barclays in 1975. Western Credit, owned by the

Sangers, had pioneered motor vehicle leasing in South Africa at the time of the credit

squeeze in the 1960s and shown considerably more enterprise the than the Colonial Banking

and Trust Company, which is why Schlesinger was attracted to it. This dynamism continued

after the merger, when Wesbank pioneered the introduction of the credit card in South Africa

in 1970. The manager of the Netherlands Branch on the campus of the University of the

Witwatersrand expressing shock at such a development and commented on how expensive it

was. Like most bank managers, trained by the old apprenticeship method, he had a prejudice

against borrowing for consumption and looked at the high interest rates that Wesbank was

charging. What Wesbank was actually doing in 1970 was repeating what had happened when

the imperial banks moved into South Africa a century earlier, introducing into the country

practices already widely available overseas. American Express had led the way to the

creation of the Barclay card in England in the 1960s. This may perhaps be considered a

further example of banking in a settler society in 1970 still about a decade behind the

metropolitan areas.

The rapid growth of Wesbank in the late 1960s and early 1980s is evidence of its

entrepreneurial drive, responding to market opportunities neglected by the cartelised

commercial banks. The business was exceptionally profitable. It was this that attracted

29

Barclays in 1975 and led to one of the two big commercial banks moving into consumer

finance. Although Trust Bank had commenced the offering of short-term credit, personal loans

and hire-purchase facilities since the early 1950s, the established commercial banks had

refrained from such operations before the 1970s. The smaller commercial banks had been

moving into merchant banking before Barclays made its move into consumer finance.

Nedbank acquired the oldest merchant bank in South Africa, United Acceptances Limited, in

1973 and shortened its name to U.A.L. Volkskas followed by taking control of the Orange

Free State Bank the following year and changed the name to Volkskas Merchant Bank, after

they had failed to get control of Senbank, the country’s largest merchant bank.

(Verhoef,1992b:128-129) The way was set for the traditional commercial banks to widen their

scope of operations by acquisition, first by buying merchant banks, then consumer finance

banks and finally by buying the building societies. This last mentioned development occurred

at the end of this period. What is clear, though, is that the banking environment by 1990 was

very different from that in 1970 and that the all encompassing financial institution had become

the norm. The changes in banking in South Africa increasingly aligned with the international

bank deregulation developments of the mid-1980s. This congruence showed the divergence

of the settler banking operations into global international banking.

The changes that were taking place in the banking sector were the result of economic growth

and technological change. Computers made possible the processing of vast masses of

information, while a broadening economic base created new demands that the banking

sector needed to meet. As a result, despite the hostile political environment and overseas

sanctions campaigns, the South African financial structure was becoming steadily more

sophisticated long before the change of government occurred in 1994. A large rural semi-

subsistance economy acted as a drag upon the upon the economy rather than as a resevoir

of cheap labour. South Africa was more like modern India with its Byzantine controls,

regulation and corruption, than modern China with its cheap labour driven industrialisation.

Either way, though, by 1990 it would be difficult to describe South Africa as a settler society

2.2 The Period of Functional Transformation, 1990-2000.

30

In the last decade of the twentieth century the financial sector was transformed. Just as a

century an a half earlier, when banking functions developed for an agricultural and trading

economy were imported into South Africa, so too in the 1990s the impact of market driven

globalisation led to massive changes in the structure and functions of the banks. Alfred

Chandler has argued that a change in strategy requires a corresponding change in

structure.(Chandler, 1962) Banking structures changed considerably during the last half of the

twentieth century. Worldwide massive expansion of banking activities had taken place, to a

large degree by means of mergers and acquisitions of minority and controlling equity

interests in foreign intermediaries, growth in foreign lending and the opening of branches

abroad in response to internationalisation of industrial and commercial enterprises. Few

international mergers and acquisitions in banking happened, since this tended to manifest

more within the domestic banking environment. (Fazio,2003:225 – 227) In almost all the G-10

nations studied by Ferguson banking concentration rose. Internationally financial

consolidation substantially decreased the number of banks, especially during the 1990s. This

consolidation movement created very large and complex financial institutions. Ferguson

observed that those firms increasingly operated across national borders, making them subject

to a variety of regulatory regimes. Important for this study is the identification of the forces

determining such international consolidation: improvements in information technology,

financial deregulation, globalisation of financial and non-financial markets and increased

shareholder pressure for financial performance. (Ferguson,2003:23-3 235). The concentration

movement transformed the financial system in four ways:

• Competition between financial institutions intensified on different levels; with

other domestic and foreign financial institutions in capital markets; competition

with respect to innovation between different financial service providers; and

competition as a result of technological innovation.

• Intensified competition between financial markets – organised national markets

compete with each other as components of the global market and they compete

with over-the-counter markets.

• Substantially enhanced standards of transparency of operations following the

emphasis on corporate governance and value creation. More bank managers

31

had become more interested in performing an active role as shareholders in

financial markets and fund managers are demanding improved profitability.

• Continued restructuring and growth to strengthen market power and/or

economies of scale. (Trinchet, 2003: 248-249)

These developments were evident in South Africa in the 1990s, as the banks bought

up building societies, merchant banks, industrial banks insurance companies stock

brokers and asset managers and integrated them into their business through intricate

conglomerate holding structures establishing vast financial services corporations.

ABSA for example, was a bundling together of two the Afrikaner banks (Volkskas and

Trust Bank), the country’s largest merchant bank and the country’s largest and third

largest building society supported by its largest shareholder, SANLAM (Suid-

Afrikaanse Lewens- en Assuransiemaatskappy - South African Life Assurance

Company) the country’s second largest insurance company. Barclays Bank South

Africa became a South African incorporated institution in 1971 and in 1987 changed its

name to First National Bank, referring to one of the institutions absorbed by Barclays

Bank DCO (The National Bank). The First Rand Group, by contrast, was the

amalgamation of a medium-sized insurance company and a merchant bank with what

had once been Barclays National Bank.

Structures had changed along with banking functions to meet the needs of a developed

economy. The banks still earned interest on overdrafts and discounts and charged fees for

foreign exchange and other services that entailed electronic payments out of accounts; but

these sources of income were now only part of a much broader complex of income earning

activities. Financial services were being commoditised and becoming less profitable at a time

when risks were increasing. Risks were increasing because of the sheer scale of operations

made possible by the new technology and because of the downward movement of the

Schumpeterian cycle in the absence of any significant innovations in banking since

1970.(Jones,2003: 245-246) The transformation of banking functions was a fact. It comes out

clearly in the Price Waterhouse Coopers survey on “Strategic and Emerging Issues in South

African Banking”, which analysed sources of earnings. The details are given in Table 1. The

most profitable segment, in which earnings were more than 30 per cent was that of the

32

centralised treasuries closely followed by investment and merchant banking. In the operation

of traditional retail banking only one bank displayed earning more than 30 per cent on its

capital employed in 2000, but three of the retail banks were earning more than 20 per cent on

capital. This in turn was reflected in the growth of their capital. Standard, First National/First

Rand and Nedcor all experienced capital growth of around 20 per cent.Jones,2003:246) Nor

surprisingly by the end of the decade the market capitalisation of the three largest, FNB/First

Rand, Standard and Nedcor, had swept them up into the ranks of the country’s largest

institutions. Though large by South African standards, market capitalisations of around R40

billion meant that they were still small by global standards.

Table 1 An analysis of the profitability of the different segments of banking in SouthAfrican in 2000.

* Represents an individual bank

Source: Price Waterhouse Coopers, Strategic and emerging issues in South African banking, Johannesburg,2001, p. 26

The size of bank capital and assets and the variety of functions executed by the banks sends

out a clear answer to the question of whether banking in South Africa was designed for a

settler community. It clearly was no longer the case by the last decade of the twentieth

century. In fact the South African financial structure was that of a first world country.

Moreover, despite having a government in alliance with a communist party and trade unions

federation, South Africa had benefited from the collapse of communism in Russia and eastern

Sector Loss-0% 0-10% 10-20% 20-30% 30%+Retail banking * ** * ** *Corporate banking * ****** ******** ***** **Investment and merchant banking - *** ***** ******** ****Private banking * *** **** *** *Treasury * *** **** *** ********Internet banking ***** *** *Credit cards ** ** ** * *Life insurance - ** *** **Brokerage ** *** ******** * **

33

Europe by the world-wide strengthening of market forces. With the election (of the

ANC/Communist government) in 1994 these strengthened market forces were free to enter

South Africa, bringing with them capital and new technology, thereby giving an imprimatur to

South Africa’s re-acceptance into the global financial community, and to Johannesburg’s re-

emergence as the premier financial centre of Africa.

Table 2 The total assets and capital of the 20 largest banks in South Africa on 31December 2000. (Rm)

Bank Assets Capital & Reserves

ABSA 169 960.9 12 321.8

Standard 150 983.7 14 556.5

Nedcor 145 825.1 11 442.7

First National 141 828.1 8 179.2

BOE 54 600.3 5 465.0

Investec 50 627.4 3 817.8

Saambou 15 251.6 1 063.1

Citibank 9 599.0 522.3

Credit Agricole 6 716.1 186.7

Genbel Securities 6 270.2 816.7

African Bank 5 779.2 792.3

Morgan Guaranty 4 524.4 465.0

Rand Merchant Bank 4 274.4 938.8

Unibank 4 203.6 695.6

Imperial Bank 4 165.7 521.5

Mercantile Lisbon 4 094.0 526.2

Barclays 4 016.0 58.4

ABN Amro 3 851.3 219.6

MLS Bank 3 346.5 277.8

Commerzbank 3 310.5 274.0Source: Financial Mail, Top Companies, 2001, p. 246

34

Conclusion

If South Africa could be considered a settler community in 1850, this was certainly not the

case in the year 2000. In the period of massive British overseas trade and colonisation, her

financial presence impacted heavily on the nature of the economies emerging under her

control. Arndt remarked: “ Whoever controls the credit of the world or a country controls the

destiny of the world or that country.” (Arndt, 1928:249) In South Africa as an emerging settler

community since the sixteenth century, capital flows to the Cape and later to other adjacent

colonies, left the footprint of the colonising company/nation on the region. Under Dutch rule

no free banking developments were permitted and therefore banking resembled the needs of

the DEIC. The mortgage bank Bank van Leening provided in the long term credit needs of a

limited agricultural community, thus ’controlling the destiny ‘of the farming community.

Banking developments under British rule introduced private enterprise in banking in South

Africa. British banking practices set the framework for the dominant nature of banking in

South Africa for the most part of the nineteenth and twentieth century. The banking practice of

British banks in the cape Colony and later in the other British colonies in South Africa,

resembled those of British banks in other British colonies, especially Australia. Ironically it

was the Bank of Australia that first requested permission to open a private bank in the Cape

Colony. The banking established by the British was that of the typical “English model” :

essentially market-oriented with banks primarily ‘deposit banks’ . These banks performed the

function explained by Davis and Gallman, of mobilising savings and over time, performing a

stronger intermediation role, whereby return to savers were enhanced and the cost of access

to capital for business reduced. Through the domination of the British banks in South Africa

until the mid-twentieth century, banking institutions in South Africa primarily acted as deposit

taking institutions. The role of intermediation was enhanced by the innovative role performed

by the NBvZA, later Nedbank, and Trust Bank. These banks introduced the “continental

model” of banking to South Africa : intermediation by banks, long-term loans and closer ties

with industry characterised their activities. Dominant banking functions in South Africa would

suggest that very limited fundamental change took place in banking functions in South Africa

before the late 1960s. Ownership of the banks is less vital – be it private ownership of

35

government ownership. What is more important are the functions of the banks and the

manner in which they were executed. In South Africa during the first century since 1850 the

traditional banking functions served the interests of business and offered what they wanted. A

fundamental overhaul of banking was delayed by the close ties of South Africa with the British

economy, the fundamental role of the gold standard and the relatively slow development of

industrialisation. Geronzi remarked: “The most widely accepted historical interpretations – the

theses of Gerschenkron and Cameron in particular- identify a fundamental link between a

country’s financial structure and its stage of economic development. In essence, the slower

and later a country’s industrialization the more heavily its industrialization will depend on the

banks and, in the more backward countries, the state.” (Geronzi, 2003: 4) Industrialisation in

the South African economy only gained momentum after the World War ll and by then the

Netherlands Bank started challenging the hegemony of the British banks, supported by the

‘Americanised’ Trust Bank. Until then prudent conservative banking provided what a settler

economy required: a free competitive market; confidence to savers (because of confidence in

the banking system) and a stable financial structure to support private capitalist enterprise in

transforming the agricultural economy into a mining economy and into an industrial economy.

The dominant position of the imperial banks in South Africa nevertheless provided stability to

the settler economy through the integration into the London financial market. This stability

served the South African economy well when, in the period of strong economic growth during

the 1960s and early 1970s, the banks offered traditional services, rather than engaging in

speculative operations which could provoke instability, which is often inherent in the process

of economic growth.

The developments of the 1970s, finally transformed the traditional operations of banks in

South Africa. South Africa did not have a secondary market for funds before the

establishment of the South African Reserve Bank in 1921(De Kock,1976:9), but thereafter

South African banking displayed the co-existence of the English model and the continental

model until late in the twentieth century, when it became imperative that the dominant old

English practice be transformed. Can it be assumes that a developed economy is different

from a settler economy and that it required a different type of banking from a non-settler

community? There is little evidence to support such a proposition. What the evidence does

36

suggest is that banking responds to the changing needs of the economy and that a relatively

simple agricultural-trading economy requires relatively simple banking services and that a

highly complex modern developed economy requires complex banking services. The banks

responded to these changing demands placed upon them and, as their strategy changed, so

too did their structure.

Market forces in the hands of private enterprise led to the first modern banks emerging in

South Africa in the second quarter of the nineteenth century and then to the imperial banks

entering the country in the second half of the century. These same market forces shaped the

functions and structure of banking in the country in response to the demands of the market.

When the market changed, the banks adapted to those demands. The banks were not

designed specially for a settler society: there is no such thing as settler society banking.

Where banking structures differed, it was because of political intervention, such as that which

kept American banks small and unitary and therefore vulnerable to downward movements in

the business cycle, especially in primary producing regions. It was also government

intervention that ensured government control over the banking system in Australia.

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